Watson Pharmaceuticals Inc.'s first quarter 2012 earnings (excluding special items) of $1.64 per share surpassed the Zacks Consensus Estimate by 4 cents and the year-ago earnings by 75 cents. Double-digit revenue growth helped boost earnings.
Revenues for the reported quarter came in at $1.52 billion, beating the Zacks Consensus Estimate of $1.48 billion and significantly above the year-ago revenues of $876.5 million. All segments contributed to the quarterly revenue growth.
Watson Pharma reports revenues under three segments – Global Generics, Global Brands and Distribution segment.
The company’s Global Generics segment posted sales of $1.12 billion, up 86%. The upside was driven by the launch of a generic version of Sanofi’s (SNY - Analyst Report) blood-thinner Lovenox in the first quarter of 2012, Pfizer’s (PFE - Analyst Report) cholesterol drug Lipitor (launched in November 2011), and Johnson & Johnson’s (JNJ - Analyst Report) attention deficit hyperactivity disorder (ADHD) treatment, Concerta (launched in May 2011).
International product sales for the division came in at $171.7 million, up 58%, driven by the acquisition of Specifar Pharmaceuticals in May 2011 and Ascent Pharmahealth Ltd. in January 2012 and new generic launches in key markets.
Gross margin (on an adjusted basis) for the segment declined 670 basis points (bps) to 45.1% from the year-ago quarter. Results were negatively impacted by the sale of authorized generic versions of Concerta and Lipitor, which generated lower margins.
R&D expenses jumped 3% to $56.1 million, primarily due to an increase in international R&D investment, resulting from the addition of Specifar Pharma. Selling and marketing (S&M) expenses amounted to $47.5 million, reflecting an increase of 55.2%, as a result of the addition of Specifar and Ascent Pharma.
Watson Pharma’s Global Brands revenue came in at $109.6 million, up 13%. Increased contributions from products like Rapaflo, Crinone and new product launches (Generess Fe, Androderm and Gelnique) aided the performance of the segment.
The segment’s gross margin (on an adjusted basis) was 76.5%, down from 81.6% in the first quarter of 2011, due to a favorable product mix in the prior-year period. R&D expenses for the segment climbed 63% to $32.4 million, primarily due to higher milestone payments and increased investment in the biologics pipeline. S&M expenses for the quarter went up 31% to $47.7 million, owing to sales force expansion in the US and Canada.
Net revenue for the Distribution segment increased 66% during the quarter to $298.6 million, due to increased third-party product launches and higher base business sales and logistical services. This segment consists of only third-party product sales.
The segment’s gross margin (on an adjusted basis) was 11.5%, down from 17.2% in the year-ago quarter. S&M expenses increased 24.5% to $22.9 million, primarily due to higher freight costs.
Guidance for 2012
For 2012, the company expects earnings (on an adjusted basis) in the range of $5.55 to $5.80 per share (previous guidance: $5.50 - $5.80 per share) on revenues of approximately $5.5 billion (increased from $5.4 billion). The current Zacks Consensus Estimate of $5.78 per share lies at the higher end of the company’s guidance range. The Zacks Consensus Estimate for revenues is $5.5 billion.
Watson Pharma expects the Global Generic segment to post revenues of about $3.9 - $4.1 billion in 2012. Brand segment revenue is expected in the range of $500 - $525 million. Distribution segment revenue is expected to come in at about $950 million - $1 billion (previous guidance: $850 - $900 million).
We currently have a Neutral recommendation on Watson Pharma. The stock carries a Zacks #3 Rank (Hold rating) in the short run. We expect new generic product launches over regular intervals to help drive the company’s top and bottom-line.